Liquid staking is a DeFi innovation that solves a key problem with traditional Proof of Stake: locked capital. When you stake ETH (or other PoS assets) directly, your tokens are locked and illiquid — you can’t use them elsewhere while they’re earning staking rewards. Liquid staking protocols solve this by accepting your tokens, staking them on your behalf, and issuing you a liquid staking token (LST) in return — a receipt token representing your staked position that can be freely traded, used as DeFi collateral, or deployed in yield strategies while you continue earning staking rewards in the background.
The leading liquid staking protocol is Lido Finance, which issues stETH (staked ETH) — representing over 30% of all staked Ethereum. Other major liquid staking tokens include rETH (Rocket Pool), cbETH (Coinbase), and mSOL (Marinade, for Solana). The liquid staking sector manages tens of billions in TVL and is consistently one of DeFi’s largest categories. LSTs enable composability: you can deposit stETH into Aave as collateral, borrow USDC against it, and deploy that USDC in other yield strategies — effectively earning multiple layers of yield on the same capital. This composability also introduces additional smart contract risk at each layer, which traders must account for in their risk management.
Example: A holder stakes 10 ETH via Lido and receives 10 stETH. The stETH accrues ETH staking rewards (~4% APY) automatically, while the holder uses it as collateral on Aave to borrow USDC for additional DeFi positions.
Learn more: Lido Finance — FAQ
